Peak Oil and the Low Carbon Transition

There have been a number of papers published recently on peak oil – the point at which oil production starts to decline. And while each paper has varying views on the timing of the peak some believe it could happen by the end of this decade. Not surprisingly, the environmental lobby has hijacked this analysis to promote the urgent need to transition from a fossil fuel to a renewable/low carbon-based economy. This is a self-defeating argument.

To try and draw a correlation between peak oil and the low carbon transition is disingenuous. It is broadly aimed at the oil majors that stand accused by the environmental lobby of delaying, or rejecting, the low carbon transition in order to service their oil business requirements, yet these oil majors are spending billions on alternative fuel development, and particularly renewable energies. Indeed with the world economy sluggishly recovering from a debilitating recession it is the oil majors that have the capital to invest in tomorrow’s low carbon economy, so it stands to reason that these corporations should extract the full value from the world’s declining oil reserves.

A key factor in realising this value is the price of oil. Earlier this month the price of WTI and Brent futures reached 18-month highs around $87/bbl, which the International Energy Agency rightly warned was unsustainable. There is a general consensus, endorsed by Opec, that the ‘ideal’ price range for oil is $70-80/bbl; the rationale being that this range is sufficiently high as to enable economic oil production and sufficiently low as to not endanger the economic recovery.

Writing in Britain’s Guardian newspaper last week [http://www.guardian.co.uk/commentisfree/2010/apr/23/peak-oil-energy-recession], Greenpeace director John Sauvan asked: “Will the expense of bringing this oil to market mean that the sustained oil prices needed to produce the oil will also consistently drive the global economy back into recession?”

Sauven supplements his thinking by citing comments made by BP chief executive Tony Hayward last summer when he observed that as the oil price went over $90, consumers "began to change their behaviour" and that there was significant "elasticity of demand above $100 a barrel".

Hayward, together with other oil industry executives, believes that the low carbon transition policies put forward by some OECD governments are both overly optimistic and costly. He is right. And both the oil industry and the environmental lobby should heed his warning of elasticity of demand above $100/bbl.

The environmental lobby would like us to believe that the recession has triggered demand destruction, not demand suppression, with this phenomenon being used by the lobby as the trigger to shift investment from oil to renewable sources. It may be that some demand has been destroyed, but according to the latest demand forecast revisions by the IEA and Opec global oil demand remains healthy and is growing. And it is due to this renewed demand health that oil prices are moving higher.

The world has to move to a low carbon non fossil fuel-based economy for both climate and oil resource reasons, but this transition has to be progressive. And if this is to be achieved the oil industry and the environmental lobby has to work together. To its credit the oil industry is positively embracing environmental change; now the environmental lobby has to view the oil industry not as the villain but as an important partner in steering the global economy toward a new and sustainable low carbon future.

Article contributed by:

Mr. Jeremy Wilcox, Managing Director, Energy Partnership